What Is The U.S. Government's Credit Score?

Although the U.S. government has the luxury that the market for its debt is the single largest securities market in the world, there is growing concern about the creditworthiness of the government and its ongoing ability to borrow. What would happen if the federal government were subjected to the same standards as its citizens and assigned a credit score? (For related reading, also take a look at Can You Hit A Perfect Credit Score?)

While the credit rating agencies jealously guard the formulas by which they calculate credit scores, a few general concepts are widely acknowledged as major factors. Let's look at how the United States would stack up for each element that goes into a credit score.

Are Bills Paid on Time?Paying on time is good, paying late is bad. Having a debt go to collection or discharging debts through bankruptcy is very bad.

Generally speaking, the United States has a very good record of paying its bills on time. The national government has defaulted on its debts just twice - back in 1790 (under the huge burden of debts incurred in the war for independence) and again in 1933 when the government explicitly changed the rules and unilaterally decided it did not have to honor the obligation to repay its debts in gold.

Along the way, the federal government has faced a few moments where creative accounting had to be employed. Nevertheless, for all of its faults and flaws, the United States scores well in terms of paying what it owes in interest and principal and doing so on time.

How Much is Owed?The larger the amount of outstanding debt, the worse the score, though this is mitigated by a borrower's ability to pay.

By absolute standards, the United States has a huge amount of debt (over $14 trillion at the national level). However, looking at public debt as a percentage of GDP, the U.S. clocks in at about 59% - in the upper third of countries, but much better off than the likes of Japan, France, Singapore, Canada and even Germany. It should be noted, though, that this figure refers to debt held by the public, and does not include external debt.

How Much Can Be Borrowed?Lenders are hesitant to loan money to applicants with a large percentage of their credit capacity being used, such as someone who has several maxed out credit cards.

Debt capacity is an area where the U.S. government likely cannot score well. Although it is true that there are legal debt limits imposed by Congress, a simple vote can increase them. To that end, the U.S. debt ceiling has ballooned from $6.4 trillion in 2002 to over $14 trillion in 2010.

In other words, there really are only minimal limits on how much the government can borrow - it would take an almost unthinkable amount of borrowing for the United States to truly max out its borrowing ability. (For more, see What Fuels The National Debt?)

The Length of Credit History and Mix of CreditThe longer someone borrows and repays money, the better. Successfully managing multiple kinds of debt (installment debt like a mortgage or student loan, or revolving credit like a credit card) adds to a lender's confidence and will improve a credit score.

The U.S. government seldom borrowed from its own citizens on a regular basis until the First World War made it impractical to borrow from foreign governments. However, the U.S. government has used debt to fund projects and wars since the very founding of the republic. Consequently, while it does not have the credit history of a nation like France or the United Kingdom, the United States would score well on this metric.

New Applications for CreditIf a potential borrower is actively seeking credit, it could be a sign of financial distress that does not yet appear.

Given the creativity of the federal government, and its willingness to try new products like the inflation-protected TIPS, it is probably fair to assign a reasonably high score to this metric. One potential problem, though - and one that the credit rating agencies do not openly discuss in terms of its significance - is that the United States has rarely paid its debts in full. Instead, the government expands its borrowing capacity and rolls over old debt with new debt offerings.

The Treasury holds regular and routine debt auctions, so an outside observer could credibly argue that the U.S. is effectively always taking new applications for credit.

And the Final Score Is…Using some of the online credit score estimators, and making some assumptions about how to translate government performance into numbers that make sense for applications designed for regular people, it is possible to at least estimate a score. In particular, it was assumed that the United States would have a tremendously large amount of outstanding debt and debt instruments, but a long history of paying on time.

Perhaps shockingly, most of these estimators come up with a score of around 650 (with a range of 625 to 720). That is basically in the middle of the range, and consistent with the recent rating on U.S. debt of A+ by China's Dagong Global, the only non-U.S. credit rating agency that seems to draw much interest or credibility. By comparison, countries like Norway, Switzerland and Singapore score an AAA from Dagong, and the United States is largely on par with Japan, France and Britain in Dagong's scoring.

The Bottom LineTo some extent, notions of credit scores just do not apply to countries. The U.S. government has an advantage that most debtors do not - if the U.S. government needs to pay its debts, it can simply print the money to do so. If you or I tried that, we would soon get a visit from the Secret Service and our credit scores would no longer be of much concern.

By the same token, nothing lasts forever. There was a time when Britain was the unassailable global financial titan and those days are long past. If the United States does not begin to tackle its debt load, its persistent deficits and its ongoing expansion of services and obligations, there will be a time when debt ratings do matter and the United States may find it cannot get all the debt it wants on easy terms. (For additional reading, check out The Road To The Worst Credit Score Ever.)